Question

Jezebel lanes her friend $7,000 to buy used car. She had her friend sign a note with repayment terms and set a reasonable interest rate on the note because she wanted her friend to understand that this was purely a loan and not a gift. Her friend is now on disability and has made it clear that she has no way of paying back the loan. How should Jezebel treat the bad loan for tax purposes?

Answer 1

Since Jezebel gives a non business loan, she can take deduction only if she can prove such become worthless.

She must have included such amount in her income or loaned out cash

Here since they made an agreement with repayment terms and reasonable interest rate it cannot be considered as a gift.

Therefore Jezebel can claim deduction for the bad loan by showing it as a short term capital loss by completing form 8949.

First it will be setoff against any capital gain then reducing other incomes upto $3,000